Adding wife as an employee

[northernladuk]

a) my company's payment pattern to me has been very consistent for the last few years: the amount is mostly below the higher tax rate ceiling. If I add my wife as an additional shareholder, that pattern will change significantly as a much larger dividend will go out of the company. Will this pattern change attract the taxman's attention?

More than the original situation but probably not unduly. The change in shareholding is more likely to particularly if you have to change it again sometime in the future. You need to stay away from dividend waivers as well.

b) There is a lot of cash in the company which itself may cause their attention.

Why on gods earth do you think a company with a healthy bank balance cause attention? You are a tiny company and the money you are talking is peanuts compared to proper businesses.

c) My company has been trading for nearly 10 years, which may have a higher probability to be IR35 investigated. Won't start a new company be safer in IR35 land as it will only have a short trading history. Hopefully, they won't pay much attention to my dormant company which I can close in future.

Again I don't think this is true. IR35 investigations come off the back of other ones such as a tax one. Opening/closing companies and changing the situation is much more likely to trigger an investigation and they can go back 6 years if they want (I believe it's 6 in extreme cases, could be wrong). Having two companies open, dormant ones etc is much more likely to have them coming for a look to see why. Just do what your business needs. Don't start up contrived situations to try fix it. That will surely bring them sniffing. One of the points they look for when sniffing out aggressive tax avoidance are changes that are not required by the business and exist for tax favourable purposes which most of what you have said is.

[TheCyclingProgrammer]

I feel that I should point out that while the Arctic case did make it much safer for spouses to share income in this way (I don't like the term shifting/splitting), it did not establish that gifting shares to a spouse is automatically exempt from the settlements legislation, it simply established some clear rules about the spousal exemption and when it is deemed to apply.

What it didn't fully address was the issue of "retained interest" and it IS still possible for settlements between spouses to be caught by the legislation and be taxable on the settlor if the settlor themselves retain an interest (a lot of people seem to ignore or miss this point for some reason).

What this means is largely a grey area until tested in court but HMRC appear to consider retaining an interest to be things like gifting shares with conditions attached (such as the settlor retaining a right to get the shares back or get the income from the shares) but some say that paying into a joint account or the income being used to benefit the settlor in any way is enough to be caught - nobody really knows for sure (but one would like to think that if retained interest was that easy to prove, HMRC would have used this line of attack in the Arctic case, but they didn't).

So make sure you speak to your accountant and do this properly if you're going to do it and make sure you take steps to minimise the risks. At the very least, accept that the shares and the dividends are your spouses to do with as they please. Also make sure you ensure that you meet the criteria necessary for the spouse exemption to apply or you WILL be caught by the settlements legislation automatically.

On the plus side, income shifting between spouses seems to be off HMRCs radar at the moment and after having little success in the courts or getting new legislation introduced the risk of a challenge is probably quite small anyway.

[Kanye]

Yes, give her the shares and split the income if she is not working.

100% legal and above board. There's no need to hide it, open a new company, or do anything complex.

HMRC tried to challenge it a few years back, but google the Arctic Systems case which ruled that splitting dividends between man & wife is fine.

Whether you choose to start a new company is a seperate issue. I think doing that is probably like to attract as much attention as it avoids personally.

If you are inside IR35, insured up, and doing everything correctly then it all seems like a lot of admin for nothing.

[malvolio]

Thanks for the replies.

I probably didn't explain my thought clearly in my original post, so I attempt to clarify more below:

I want to make my wife a share holder so we can share the profit via dividend.
The factors which prompt me to think about making my current company dormant and start a new company with my wife are:
a) my company's payment pattern to me has been very consistent for the last few years: the amount is mostly below the higher tax rate ceiling. If I add my wife as an additional shareholder, that pattern will change significantly as a much larger dividend will go out of the company. Will this pattern change attract the taxman's attention?

b) There is a lot of cash in the company which itself may cause their attention.
c) My company has been trading for nearly 10 years, which may have a higher probability to be IR35 investigated. Won't start a new company be safer in IR35 land as it will only have a short trading history. Hopefully, they won't pay much attention to my dormant company which I can close in future.

Is this reasoning flawed?

Ian

Not flawed but perhaps pointless. How you operate your company is up to you, including the way it deals with its income. Closing it off and immediately opening a new one in the same line of business is not a smart idea and is more likely to attract attention.


You can't be prosecuted for income sharing with your spouse as long as the shares are of the same class; Arctic proved that. So just allocate her shares.

[ian2013]

Thanks for the replies.

I probably didn't explain my thought clearly in my original post, so I attempt to clarify more below:

I want to make my wife a share holder so we can share the profit via dividend.
The factors which prompt me to think about making my current company dormant and start a new company with my wife are:
a) my company's payment pattern to me has been very consistent for the last few years: the amount is mostly below the higher tax rate ceiling. If I add my wife as an additional shareholder, that pattern will change significantly as a much larger dividend will go out of the company. Will this pattern change attract the taxman's attention?

b) There is a lot of cash in the company which itself may cause their attention.
c) My company has been trading for nearly 10 years, which may have a higher probability to be IR35 investigated. Won't start a new company be safer in IR35 land as it will only have a short trading history. Hopefully, they won't pay much attention to my dormant company which I can close in future.

Is this reasoning flawed?

Ian

[Wanderer]

the wife hasn't been working. I am thinking of adding her as an employee to my company but have some worry. Over the years, I receive a lowish income (salary and dividend) from the company. The total income each year has been kept just under the higher rate tax band. So a considerable amount of cash stayed in my company's account.

If your company is cash rich then I'd shut it down and do a capital distribution, google for: site:contractoruk.com Member's Voluntary Liquidation

if I split the income with my wife by giving her shares, will the tax man get very suspicious and target me given there is a lot of cash in my account and they would think the whole set up is purely for income shifting?

Probably. So long as you and your partner are married and you are outside IR35 then it's perfectly legal and they can't do much about it. If your company is cash rich then it's a jucy target for HMRC so I'd be inclined to close it with a MVL and take the money so HMRC will have a much harder time getting their sticky mitts on it.

PS I do have an accountant, but he doesn't seem to be able to give me convincing answers on this matter Where should I go to get a more authoritative answer?

Might be an idea to get a new accountant. Phone your current one up and say you want to do this:

1. Get an IR35 review
2. Close the existing company with a Member's Voluntary Liquidation
3. Set up a New company with 2 shareholders
4. Pay your wife salary/dividends

There are a number of other factors to consider, if your wife starts earning money elsewhere then it will make her tax affairs complex so watch out and above all, make sure you are getting some proper advice - I could be completely wrong here....

[Jessica@WhiteFieldTax]

PS I do have an accountant, but he doesn't seem to be able to give me convincing answers on this matter Where should I go to get a more authoritative answer?

Ian

On some of those issues there is no definitive answer, although an accountant should be able to give you a fairly good steer, it comes down to your personal appetite for risk.

[DirtyDog]

I have been contracting for nearly 10 years (one man, ltd company). I got married last year and the wife hasn't been working. I am thinking of adding her as an employee to my company but have some worry. Over the years, I receive a lowish income (salary and dividend) from the company. The total income each year has been kept just under the higher rate tax band. So a considerable amount of cash stayed in my company's account. My question is: if I split the income with my wife by giving her shares, will the tax man get very suspicious and target me given there is a lot of cash in my account and they would think the whole set up is purely for income shifting?

Employee or shareholder? Dividend or salary? How you do these things makes a big difference. Split the income and it becomes risky; shares which pay dividends are a different matter between spouses.

Someone suggested me to set up a new company with my wife and give her equal share, or make her the director and I work for her in the new company. This way it's harder for the tax man to claim I gift her my income. Is this a good idea?

No, it's a terrible idea.

PS I do have an accountant, but he doesn't seem to be able to give me convincing answers on this matter Where should I go to get a more authoritative answer?

A better accountant.

[ASB]

Of course it is income shifting. What else might it be?

The question is whether it is going to get caught settlement legislation or not.

I assume you have calculated an appropriate level on shareholding to maxi.ise both of your basc rate allowances bearing in mind any income your wife may receive in the future.

It is easy enough to search and consider the pros and cons and how they fit into your own risk profile.

[Martin at NixonWilliams]

I am unsure what you are proposing - are you thinking of adding your wife as an employee, a shareholder or both?

Someone suggested me to set up a new company with my wife and give her equal share, or make her the director and I work for her in the new company. This way it's harder for the tax man to claim I gift her my income. Is this a good idea?

This is not a good idea! Your position would not change from an income shifting point of view. Have a read of the S660 guide on the right hand side of this page to help your understanding of the factors that determine whether income shifting applies.

If I do start a new company, I will have to make my current company dormant because if I close it and take all the money now, I will have to pay a big tax bill immediately. Is making it dormant a viable option? If I make the company dormant, will I still able to use the dormant company's fund to pay my pension?

I would advise against setting up the new company altogether. However, if you do, you will not receive tax relief on the pension contributions as they cannot be considered trade related if the company is dormant.

I hope this helps.

Martin

[ian2013]

Hi,
I have been contracting for nearly 10 years (one man, ltd company). I got married last year and the wife hasn't been working. I am thinking of adding her as an employee to my company but have some worry. Over the years, I receive a lowish income (salary and dividend) from the company. The total income each year has been kept just under the higher rate tax band. So a considerable amount of cash stayed in my company's account. My question is: if I split the income with my wife by giving her shares, will the tax man get very suspicious and target me given there is a lot of cash in my account and they would think the whole set up is purely for income shifting?

Someone suggested me to set up a new company with my wife and give her equal share, or make her the director and I work for her in the new company. This way it's harder for the tax man to claim I gift her my income. Is this a good idea?

If I do start a new company, I will have to make my current company dormant because if I close it and take all the money now, I will have to pay a big tax bill immediately. Is making it dormant a viable option? If I make the company dormant, will I still able to use the dormant company's fund to pay my pension?

Ian

PS I do have an accountant, but he doesn't seem to be able to give me convincing answers on this matter Where should I go to get a more authoritative answer?

Ian